Income Property Organization is pleased to present the Korvette Portfolio, which consists of 113 multifamily units and a free-standing medical office building located in Roseville, Michigan.
The bulk of the portfolio (95 units and the medical office building) is located along 12 mile Road between Gratiot Avenue and I-94. The remaining 18 multifamily units are located less than ¼-mile from of this central Roseville location. Roseville itself is home to approximately 47,637 residents per the 2015 Census estimate and greater Macomb County is home to roughly 864,840 residents, making it Michigan’s third largest county.
The city of Roseville is strategically located, with convenient access to several major thoroughfares in the area. It is bounded by I-94 to the east, bisected by I-696; to the west is M-97 (Groesbeck Highway) and M-3 (Gratiot Avenue) serve as the main surface road and is the heart of the retail community, replete with both big box retailers and boutiques shops. This excellent location facilitates commutes and enables convenient access to all of Metro Detroit for residents and businesses.
Roseville is a family-orientated community with well-kept neighborhoods and offers residents big city amenities with a small town feel and services. The Korvette Portfolio is in the immediate vicinity of a Walmart Supercenter, Roseville High School, and a few minutes from Lake St. Clair-the popular destination for boating enthusiasts and a world-class fishery. Also nearby is the famed Nautical Mile, in neighboring St. Clair Shores. The Macomb Mall is located in Roseville and is a major retail outlet in the area-roughly 1½ miles from the Portfolio. Industry plays a significant role in the local economy, with automotive, military and other heavy manufacturing applications along the Groesbeck Highway industrial corridor. Given the points of access to multiple interstates and CN Railway, Roseville is a desirable location for an array of industrial sector employees. The median household income for Roseville was $40,646 as of the 2014 Census estimates.
The Korvette Portfolio is comprised of two multifamily communities totaling 113 units (with one unit being utilized as an office) and a free-standing medical office building. The flagship of this portfolio is the gated and controlled access 86-unit Korvette Apartments and Medical Office, which is located at 19140-19400 12 Mile Road and acts as the central office for the portfolio. Additionally there is a 9-unit ranch style building located across the street (19175 12 Mile) and an 18-unit located three blocks away within a residential area (18630 Florence).
The multifamily portion of this portfolio was constructed between 1965-1978 and is comprised of a competitive unit mix of six studios (500 ft.2), eighty-six one-bedroom units (600-700 ft2) and twenty two-bedroom units (750 ft2). The free-standing Medical Office Building is approximately 1,080 ft2 and has been occupied by the same dentist office for many years under a double-net lease. Perhaps the most compelling aspect of this portfolio is that that the heat for all 113 units is tenant-paid and all units are separately metered for electricity. This aspect of the portfolio provides ownership considerable cost savings in a climate such as Michigan’s.
Over the course of the last five years the Korvette Portfolio has seen a considerable level of improvements including kitchen and bathroom upgrades in roughly 67 apartments that included the installation of granite countertops and all new fixtures, numerous roof replacements, a security fence and gate, the complete overhaul of any damaged balconies, many new vinyl windows, and considerable concrete and drain repairs. In all it is estimated that well over $500K in capital improvements were done to the properties; however, ownership has expensed a large portion of these improvements and done much of it with in-house labor making it difficult to accurately estimate the true dollar amount, which in all likelihood is well above this estimate.
The Korvette Portfolio is currently professionally managed and operated by a staff that includes a manager, a leasing agent, a maintenance super and two maintenance technicians. The current staff has expressed interest in staying on with a new owner, which is an added benefit in today’s marketplace where quality trained staff is difficult to come by. It is also noteworthy to mention that the current management company would stay in-place if an investor desired a truly turn-key operation and transition of ownership.
The Korvette Portfolio is performing at a high level of operations with physical occupancy at 98% and bad-debt levels less than 0.5% (in 2016 there were only 8 evictions). However, even in light of this stellar level of performance upside still remains for a multifamily investor. Based on our carefully conducted rent comparable study, it was determined rents are considerably below market when analyzed under both the price per square foot and Street Rent metrics. This conclusion is fortified by the practical observation that anytime an apartment community is nearing 100% occupancy it is a market signal that the rental rates can be increased.
Our study found that one-bedroom units are approximately $68 below market average Street Rents and two bedrooms are a staggering $133 below market. Such a delta between existing and market rents provides a new owner with the unique opportunity to greatly improve this assets cash-flow position without making any financial investment in the property.
For example if a new owner were to increase average rents by a mere $50 per month it would increase this assets NOI by roughly $72K, thereby increasing the portfolio’s value by over $1.0M (at a 7.0% capitalization rate). It is imperative to note, current market rents are $550, $570 and $670 for studio, one-bedroom, and two-bedroom units respectively. Management has indicated that they are easily obtaining these market rents on new leases, which are consistent with the market average as indicated within our rental study. In addition to below market rental rates, currently ownership does not charge a water reimbursement fee. Over the course of the last few years, IPO has observed that utility bill-back to tenants has become an industry standard and it is our professional opinion that such a program could be instituted across the portfolio thereby greatly reducing the annual water expense and further growing the NOI.
From and underwriting standpoint, our Pro Forma is based on actual 2016 Operating Expenses with the omission of expensed capital improvements and the inclusion of a professional management fee, a Replacement for Reserve and taxes adjusted to the SEV. Income was projected with the use of average rents, which does not factor in the previously mentioned “upside” of a rental rate increase. We have also included a vacancy and bad debt factor that is higher than current property trends, yet mindful of standard underwriting protocol.
IPO has seen a drastic improvement in pricing over the course of the last 36 months and it is our professional opinion that values will continue to trend upwards into 2017 as a result of historically low multifamily inventory coupled with an abundance of equity and debt in the marketplace. The Korvette Portfolio represents stabilized assets with considerable upside potential that can provide handsome & steady returns to a multifamily investor for many years to come. Please contact IPO to arrange a confidential tour before this opportunity is gone.